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Laws
Effective in 2001 |
The
tax laws enacted in the last couple of years contain important
provisions that are effective for the first time in 2001. In
addition, key established tax breaks are liberalized beginning
in 2001. To inform you of what is new in the tax rules, here
is a summary of the major tax changes in 2001, broken down into
three categories:
• Personal Income Taxes
• Retirement Plan Changes
• Tax Changes for Business
Personal Income Taxes
Lower taxes on 5-year capital gains. Persons who are in the
15% tax bracket will pay a tax of only 8% (rather than 10%)
on capital gains from assets such as stock that they have held
for at least five years before sale. If you are in a higher
tax bracket, the rules are different. Gain from the sale or
exchange of capital assets held more than 5 years will be taxed
at 18% (as opposed to 20%), but only if they were bought after
2000. As a result, those in higher brackets will not benefit
from a lower capital-gains rate before 2006.
Those in the 28% bracket or higher can make a special election
for a capital asset they owned at the beginning of 2001. If
the election is made for stock, it is treated as having been
sold on January 2, 2001 for its closing market price on that
date, and reacquired on that date for that closing market price
(the deemed sale date is January 1, 2001 for eligible capital
assets that are not marketable securities). Any gain is recognized
(included in income), but a loss on the deemed sale is disallowed.
This election assures that any gain five years down the road
will not be taxed higher than 18% while avoiding sales and purchase
commissions. Once made, the deemed-sale-and-repurchase election
is irrevocable.
Higher estimated tax payments for some. Your estimated
tax burden for 2001 may increase slightly if your adjusted gross
income for 2000 was over $150,000 ($75,000 for married filing
separately). If you fall in this category, you will escape an
estimated tax underpayment penalty for 2001 if your estimated
tax payments for 2001 are at least equal to (1) 110% of the
tax shown on your return for 2000, or (2) 90% of the tax for
2001, whichever is less. For 2000, if your adjusted gross income
for 1999 was over $150,000 ($75,000 for married filing separately)
you escape an estimated tax underpay-ment penalty for 2000 if
your estimated tax payments for 2000 were at least equal to
(1) 108.6% of the tax shown on your return for 1999, or (2)
90% of the tax for 2000, whichever is less.
Higher threshold for nanny tax reporting. Pay for a domestic’s
services in your home is not subject to social security tax
(FICA) if the amount you pay the domestic during the year is
below $1,300 ($1,200 for 2000).
Retirement Plan Changes
Required minimum distribution rules overhauled. You
must begin taking minimum annual distributions from your traditional
IRAs, 401(k)s, and other individual accounts in an employer-sponsored
defined contribution plan (such as a profit-sharing plan) when
you attain a certain age. For most people, the required beginning
date for payouts is April 1 following the year in which they
turn age 70-1/2. The IRS has just simplified and liberalized
the rules that determine the minimum annual distribution that
must be withdrawn from these types of retirement accounts. In
general, you will have to withdraw less each year under the
revised rules than you did under pre-existing IRS guidance.
For those looking to withdraw the rock-bottom minimum from their
retirement plan accounts, the new rules will result in a lower
tax bill, a longer-lived tax shelter for the family, and potentially
larger payouts for the owner’s beneficiaries. The IRS has
made many other changes in the required minimum distribution
rules. For example, you no longer have to name a designated
beneficiary when you begin taking required payouts from your
retire-ment accounts.
Key pension figures are changed. Several figures important
for purposes of calculating pension- and profit-sharing plan
benefits have gone up for 2001.
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For
example:
The dollar limit on the annual benefit that can be funded
in a defined benefit (i.e., pension-type) plan is $140,000
($135,000 in 2000);
The annual additions to a defined contribution plan account
increase to the lesser of 25% of compensation or $35,000
(up from $30,000 for 2000); and
The maximum amount of compensation an employee may elect
to defer under a SIMPLE plan increases to $6,500, up from
$6,000 for 2000. |
Tax Changes for Business
Higher expensing limit. The maximum amount of equipment
purchases that can be expensed (currently deducted instead
of being depreciated over a period of years) is $24,000 ($20,000
for 2000).
Higher business mileage rate. The simplified deduction
for business automobile use during 2001 is 34.5 cents per
business mile traveled (up from 32.5 cents for 2000).
You may have to file via electronic deposit. Your business
must use the Electronic Federal Tax Payment System (EFTPS)
for all depository taxes (e.g., employment, excise tax, corporate
income tax) if the total of such taxes in 1999 was more than
$200,000, or it was required to use EFTPS in 2000.
More small businesses can pay employment taxes quarterly.
Effective January 1, 2001, businesses may make employment
tax payments quarterly (rather than monthly or more frequently)
if they have less than $2,500 in quarterly employment taxes
(the threshold had been $1,000).
January 31, 2001
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